Why Home Prices Are Still Rising Even as Inventory Recovers

According to the National Association of Home Builders, or NAHB, there is currently a 4.4-month supply of both new and existing homes for sale. A months supply is a common calculation used in the market to measure the time it would take to sell all available homes at the current sales rate. A six-month supply is considered a balanced market with buyers and sellers.

Supply was low at the start of the decade, but pandemic-driven demand pushed it to a record low of just two months’ supply in early 2021. The shortage of homes for sale, combined with strong demand, has pushed home prices up more than 40% from pre-pandemic levels.

Now supply is finally starting to pick up again, but most of the gains are coming from the new-home market, not the existing-home side. In fact, there is now a nine-month supply of newly built homes for sale, nearly three times the supply of existing homes. New and existing-home supply tend to track quite closely. According to the NAHB, new construction now accounts for 30% of total inventory, about twice the historical rate.

“June 2022 recorded the largest monthly increase in new home supply (9.9) compared to the monthly increase in existing single-family home supply (2.9),” wrote Robert Dietz, NAHB chief economist. “This separation makes it clear that assessing inventory in the current market cannot be done by looking at either existing or new home inventory alone.”

This unusual dynamic stems from recent fluctuations in mortgage rates and the unprecedented housing market disaster that began 20 years ago.

This housing market is unlike any other because of economic forces unlike any other market. First, in 2005, there was a huge increase in home sales, home construction, and home prices driven by the rise of subprime mortgage lending and a rush to trade new financial products backed by these mortgages.

All of that collapsed quickly, leading to one of the worst foreclosure crises since the Great Depression and triggering the Great Recession that followed. Single-family home starts plummeted from a peak of 1.7 million units in 2005 to just 430,000 in 2011. By 2012, new homes accounted for just 6% of the total supply for sale, and even in 2020, housing starts had not yet recovered to their historical average of about 1.1 million units. They stood at 990,000.

Then the Covid-19 pandemic hit, and in the meantime, consumer demand soared and mortgage rates hit a dozen record lows, so builders responded. Housing starts soared to 1.1 million in 2021. The Federal Reserve bailed out the economy, making home buying much cheaper, and the new work-from-home culture had Americans moving around more than ever. Suddenly, supply was sucked into a demand vortex.

The current strange split in supply between new construction and existing homes is also due to the wild swings in mortgage rates, which fell to record lows at the start of the pandemic and then spiked to 20-year highs just two years later. Millions of borrowers refinanced at low rates and are now reluctant to move because they would have to swap their 3% or 4% loans for current rates of around 7%. This lock-in effect has dried up new listings.

It also puts builders in the lead. Homebuilders ramped up production in the early years of the pandemic, with the number of single-family homes soaring to more than 1.1 million in 2021, according to the U.S. Census, before falling back as mortgage rates spiked. Builders were able to buy mortgage rates lower to keep sales higher, but as of May, they were building at an annualized rate of 992,000.

Resale listings improved slightly this spring as mortgage rates eased, and as of June, active listings were 16.5% higher than a year earlier, according to Redfin. But some of that increase in supply is due to listings sitting on the market longer.

“The percentage of homes on the market for at least a month has increased year-over-year since March as new home listing growth accelerated, but buyer demand has remained subdued since mortgage rates began rising in 2022,” Redfin reported.

In the resale market, supply is lowest in the $100,000 to $500,000 price range, according to the National Association of Realtors. That’s where most buyers are now. Higher mortgage rates are driving them to look for cheaper homes.

Interestingly, however, while supply is increasing at all price points, supply is increasing the most at those same lower price points, meaning there simply aren’t enough homes. As quickly as homes are coming to market, they’re also going under contract.

For example, there is only a 2.7-month supply of homes for sale between $100,000 and $250,000, but supply has increased 19% from a year ago. Meanwhile, there is a 4.2-month supply of homes priced above $1 million, but supply has increased only 5% from a year ago.

That explains why home prices remain high, even as supply improves. Prices in May, the latest available data, were 4.9% higher than in May 2023, according to CoreLogic. The increase has started to ease, but not everywhere.

“The continued strong home price gains this spring continued in markets with inventory well below pre-pandemic levels, such as those in the Northeast,” said Selma Hepp, chief economist at CoreLogic.

“In addition, relatively more affordable markets, such as those in the Midwest, also saw healthy price increases this spring.”

Hepp noted that Florida and Texas, which are seeing greater growth in the supply of homes for sale, are now priced lower than they were a year ago.

While analysts expect prices to fall and mortgage rates to fall in the second half of the year, it remains to be seen whether rates will actually fall and whether the supply-demand imbalance will allow prices to cool. If mortgage rates fall, demand will inevitably surge, putting further pressure on supply and keeping prices high.

“Yes, inventory is rising and will continue to rise, especially as the mortgage rate lock effect fades in the coming quarters. But current inventory levels continue to support new construction activity and some price increases, nationwide,” Dietz added.